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Airline Biz Crisis: Not Difficult To Predict



 
 
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  #21  
Old October 3rd, 2005, 05:34 AM
Robert Cohen
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I did post an error of fact about "$500,000 Delta pilot salary."

I hope this rectifies, clarifies, and satisfies, because I'm nearly
mortified.


BUSINESS/FINANCIAL DESK


Delta Pilots Vote to Accept 32.5% Pay Cut

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By MICHELINE MAYNARD (NYT) 917 words
Published: November 12, 2004

Pilots at Delta Air Lines overwhelmingly approved a new five-year
contract yesterday with $1 billion in annual concessions sought by the
airline, which had threatened to file for bankruptcy if the pilots did
not acquiesce.
The deal, which cuts pay by 32.5 percent, would reduce the salary of
the highest-paid Delta pilot by more than $90,000, to about $185,000 a
year. It ends an era of luxurious pilot pay in the airline industry,
but does not end Delta's problems.


Delta, the nation's third-largest airline, must still arrange new terms
on its debt, slash its costs and carry out a strategy that it hopes
will take it through the industry's gathering storm.

''There are no winners at this point,'' Delta's chief executive, Gerald
A. Grinstein, said yesterday in a letter to pilots. ''We unfortunately
remain in turbulent times.''

The pilots' vote simply allows Delta to ''back away from the cliff by
several steps,'' said Philip A. Baggaley, an airline analyst with
Standard & Poor's Ratings Services.

The Air Line Pilots Association, which represents Delta's pilots, said
the pact was approved by 79 percent of those voting. It said about 91
percent of its members at Delta cast ballots -- considered a high
turnout in a union vote. Delta's pilots are the airline's only
unionized labor group.

But the stakes were high for both the pilots and Delta, which is based
in Atlanta. The airline had threatened repeatedly to seek bankruptcy
protection unless its pilots agreed to cut the wages and benefits that
had made them the best paid in the airline industry.

''Our airline has been managed to the brink of bankruptcy and the Delta
pilots had to decide between two bad choices,'' John Malone, chairman
of the master executive council of the pilots' union, said in a
statement yesterday. ''They chose the lesser of two evils.''

The union and the airline reached a tentative agreement on Oct. 28,
hours after a deadline for a deal, set by Mr. Grinstein. When the two
sides finally agreed, Delta's lawyers were waiting in New York for a
telephone call from Atlanta authorizing them to file bankruptcy papers.


''This decision is meaningful to everyone at Delta,'' Mr. Grinstein
said in his letter to the pilots. But he added, ''Delta must stay
competitive with the marketplace if we are to survive and compete.''

Delta's most senior pilots, flying its biggest aircraft, earned as much
as $287,000 a year. By contrast, JetBlue Airways, a low-fare carrier
that does not have unions, pays a top salary of $108,000 a year. Pilots
at American Airlines, United, Northwest Airlines and US Airways have
all approved cuts in the last year; Continental Airlines is in talks
with its pilots.

Along with pay cuts, Delta will also freeze its traditional pension
plan for pilots and replace it with a less-generous 401(k) plan. Delta
will also require pilots to pay more for health care. Pilots will be
given the right to purchase options on 30 million new Delta shares.

Delta's salaried employees have already taken 10 percent pay cuts,
while Mr. Grinstein took the equivalent of a 25 percent cut in
September. The airline has said it plans to cut up to 7,000 jobs
through 2006.

Approval of the cuts by Delta's pilots allows Delta to conclude lending
agreements with GE Capital Aviation Services and American Express
Travel Related Services. The airline is also trying to persuade holders
of $20 billion in debt to accept terms more favorable to Delta. It will
get the results of that offer next week.

On top of that, Delta has announced plans to fight both its big rivals
and low-fare airlines that are taking bites out of its traditional
strongholds in Atlanta and Florida. Early next year, it will adjust its
schedules to focus more on direct flights from hubs in Atlanta,
Cincinnati and Salt Lake City, and it will close its hub in Dallas.

But if it cannot knit all those pieces together, analysts said, Delta
could find itself again on the brink of Chapter 11.

One tool the airline expects to lean upon more heavily is Song, the
low-fare operation started by Delta last year, featuring lime-green
Boeing 757 jets and uniforms designed by Kate Spade. Delta's precarious
finances stalled Song's growth plans in 2003. But Delta plans to add a
dozen more planes and new cities to Song's lineup next year.

Derided in some aviation circles as a marketing gimmick, Song has to
prove it can be consistent -- planes range from half-empty to nearly
full and profits from minuscule to generous, depending on the route.

Song does best on routes to Florida, and worst to Las Vegas, people
inside the airline with knowledge of its operations said. Delta has
never broken out separate results for Song.

Another of the industry's troubled airlines, US Airways, reached deals
with lenders and lease holders that will allow it to keep flying most
of its aircraft, although it said leases on four of its 282 planes were
likely to be rejected. On Sept. 12, US Airways filed for bankruptcy
protection for the second time in two years.






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  #22  
Old October 4th, 2005, 02:34 AM
Jeff Hacker
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"Robert J Carpenter" wrote in message
...

"James Robinson" wrote in message
. 97.142...

ALL SNIPPED.

I find it interesting that US Air(ways)'s route structure is not all
that different from Eastern's ... with the additon of a few European
flights and without the Caribbean dominance.

But the circumstances surrounding US Airways' problems and what killed
Eastern are different. Low Cost Carriers were not such a force in the
period leading up to Eastern's 1991 shutdown.




  #23  
Old October 9th, 2005, 02:35 AM
James Robinson
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Default

"Robert J Carpenter" wrote:

I find it interesting that US Air(ways)'s route structure is not all
that different from Eastern's ... with the additon of a few European
flights and without the Caribbean dominance.


It stands to reason, given that Piedmont, now part of US Airways, served
many of the same cities as Eastern, but not necessarily the same routes.
When Eastern packed it in, it was a fairly easy expansion to add the old
Eastern routes to the Piedmont network.
  #24  
Old October 9th, 2005, 02:42 AM
James Robinson
external usenet poster
 
Posts: n/a
Default

"Jeff Hacker" wrote:


"Robert J Carpenter" wrote

I find it interesting that US Air(ways)'s route structure is not all
that different from Eastern's ... with the additon of a few European
flights and without the Caribbean dominance.

But the circumstances surrounding US Airways' problems and what killed
Eastern are different. Low Cost Carriers were not such a force in the
period leading up to Eastern's 1991 shutdown.


On the contrary. One of Eastern's major problems was that they had
taken on a fare war with People Express, significantly adding to
Eastern's debt load. PE started head-to-head service at cut rates on
Eastern's bread-and-butter leisure routes between the Northeast and
Florida.

Eastern had been trying to expand their network to make themselves large
enough to compete, but incurred costs in acquiring Braniff's South
American routes and establishing a hub in Kansas City. Those costs
added to the cost of fighting off People Express are what set the stage
for Eastern's problems. When the travel market dropped along with
revenue, with the start of the first Gulf war, they couldn't meet the
necessary cash flows.

The situation today isn't much different. The legacy carriers cannot
sustain their costs and debt against the lower cost of the newer
carriers.
  #25  
Old October 9th, 2005, 05:26 AM
James Robinson
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Default

"Reef Fish" wrote:

Again, to re-iterate, Robert Cohen started this thread saying
Eastern's surmise was easy to predict because it was overpaying the
pilots and a few other extravagent spendings.

I disagreed, in general principle, on the Free Market principle that
no salary is too high, and cited examples in sports where the teams
didn't go bankrupt because they pay some players millions of dollars a
year -- which *I* think is ridiculous, but that's what the market will
bear.


Not entirely. Many of the weaker teams cannot afford the higher salaries
of the star players. Even with a redistribution of broadcast income,
they may not be able to survive. A recent example was the sale of the
Montreal Expos, which could not generate sufficient income to pay the
salaries of really good players. They would lose any standouts to
higher paying teams, leaving them with second string players.

Again, in GENERAL principle, any business that fails ultimately can be
blamed on the owner of the business (or its management).


Perhaps in a general sense, but there are examples which defy the rule:
The management of transatlantic steamship companies could do very little
to counter the introduction of the jet airliner. The rules of the game
changed overnight, and they lost the majority of their passengers just
that fast. No reduction in fares would have been sufficient to retain
the business.

James blames it all on deregulation.


That's a bit too black and white, though I certainly feel that
deregulation was the root of their problems. They fell sooner than
other airlines because of bad timing and bad luck, which has some
management overtones. While a different management strategy might have
helped somewhat, it would have only delayed the inevitable. A company
like Eastern could not change quickly enough to react to the effect of
deregulation.

If it were a completely deregulated industry, then it would have been
the Free Market, and that would be the perfect business environment
for competition and survival of the fittest. Unfortunately the
deregulation is only PARTIAL, and the airlines are subject to all
kinds of regulations which restricted their "free" choices!


Again, the rules can change fast enough that they still can't compete.
Airlines like Eastern were sitting fat and happy under regulation. They
had cost structures that matched the business at that time. Aircraft
fleets were shaped to their business, with associated long-term debt
repayments. Union agreements were made based on anticipated incomes.
Passenger amenities were provided based on the competition at the time.
Streamlining that historic cost structure is not something that happens
overnight, even if the management recognizes that it is necessary for
survival.

I am somewhat sympathetic to the theory of blaming it all on the
change of rules that is bring down the entire airline industry,
leaving no airline unscathed.

If that WERE the case, then the airlines themselves are to blame for
the collective stupidity of not getting OUT of competition that kills
everyone, winner and loser! There is no regulation against an airline
selling itself (while it was still profitable) and get into other
industries of better fair-competitions among large and small
companies.


It was too late to get out. Once deregulation established the lower
cost, all of the airline's assets devalued to the point where the
companies were defacto in bankruptcy. All they could do is cut and run,
but that also assumes that the management of the company has the benefit
of seeing what eventually happened to the industry. Eastern, and their
shareholders, thought they could survive by expanding to gain a critical
mass that would support their high cost structure.

Therefore, their options were to declare immediate bankruptcy, or try
the alternative of growing to profitability. The tried the latter, and
the financial downturn of the Gulf war was their eventual undoing.

To me, that's the bottom line of "the buck stops at the Management".


That's very convenient, and simple to say, but luck also enters into the
picture. Business is usually a gamble, and certainly never a sure
thing. Some people take the risk and win, others lose. If they only
ever bet on the sure things, our economy would be dead.

Hero or goat, the glory or blame goes to the decision maker.


That's what capitalism is about. However, there are also those who
begrude the winners the glory when they make it big. Look at the oil
companies and their profits.

That's how K-Mart, S-Mart, and other Marts all lost to the
better-managed Wal-Mart. Walmart didn't get big (like American)
overnight. It just grew by leaps and bounds because of better choice
of products, better layout for that kind of market, etc. It's unfair
competition to other retail store NOW -- that's for sure!


Nothing unfair about it. That is how all business operates. WalMart
simply is winning by a better strategy and deserve credit for their
accomplishment. Unlike the airline industry, they did not sweep over
their competitors because of a parallel to airline deregulation. Rather
than a revolution, the retail industry simply evolved.

I am back to the Free Market principle via the same route! Every
business has a CHOICE to compete or not, or how to compete, in an
unregulated market seemingly dominated by one BigBoy. The computer
and software industry seems to be doing quite well, with many
companies going down the tubes against Big Blue or Microshaft, while
other companies are competing successfully in the industry dominated
(past or present) by those Big Boys. Untimately the one-time Big Boy
of Big Blue had to re-evaluate its market to start as a Little Boy to
compete against Bill Gate's Big Boy.

That's the way free competition should be. The USA is hardly a
perfect Free Market, but is about as good as it gets, in practice.


That's nice to say in theory, but it is rarely the case in a high
capital cost industry like transportation. Classic textbooks on
transportation economics describe how a certain amount of regulation is
necessary to keep such businesses from engaging in destructive
competition. In an effort to provide any contribution to their capital
cost, they will slash fares to barely above their marginal cost of
business, and ensure that nobody makes a decent return on their
investment. With no regulation, the transportation industry will tend to
form natural monopolies, which is equally undesireable.
  #26  
Old October 9th, 2005, 02:58 PM
Jeff Hacker
external usenet poster
 
Posts: n/a
Default


"James Robinson" wrote in message
. 97.142...
"Robert J Carpenter" wrote:

I find it interesting that US Air(ways)'s route structure is not all
that different from Eastern's ... with the additon of a few European
flights and without the Caribbean dominance.


It stands to reason, given that Piedmont, now part of US Airways, served
many of the same cities as Eastern, but not necessarily the same routes.
When Eastern packed it in, it was a fairly easy expansion to add the old
Eastern routes to the Piedmont network.


US Airways acquired Piedmont in 1987. Eastern shut down in 1991.


  #27  
Old October 9th, 2005, 05:13 PM
Frank F. Matthews
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Posts: n/a
Default



James Robinson wrote:
"Reef Fish" wrote:

Again, to re-iterate, Robert Cohen started this thread saying
Eastern's surmise was easy to predict because it was overpaying the
pilots and a few other extravagent spendings.

I disagreed, in general principle, on the Free Market principle that
no salary is too high, and cited examples in sports where the teams
didn't go bankrupt because they pay some players millions of dollars a
year -- which *I* think is ridiculous, but that's what the market will
bear.



Not entirely. Many of the weaker teams cannot afford the higher salaries
of the star players. Even with a redistribution of broadcast income,
they may not be able to survive. A recent example was the sale of the
Montreal Expos, which could not generate sufficient income to pay the
salaries of really good players. They would lose any standouts to
higher paying teams, leaving them with second string players.


Again, in GENERAL principle, any business that fails ultimately can be
blamed on the owner of the business (or its management).



Perhaps in a general sense, but there are examples which defy the rule:
The management of transatlantic steamship companies could do very little
to counter the introduction of the jet airliner. The rules of the game
changed overnight, and they lost the majority of their passengers just
that fast. No reduction in fares would have been sufficient to retain
the business.


Reduction in fares would not have worked. Perhaps, however, rethinking
the business plan and trying to consider how to redeploy their assets
might have managed a much better 60s. They were quite wedded to the
transportation model and loth to try the Cruise model.


snip
  #28  
Old October 9th, 2005, 06:39 PM
Reef Fish
external usenet poster
 
Posts: n/a
Default


James Robinson wrote:
"Reef Fish" wrote:

Again, to re-iterate, Robert Cohen started this thread saying
Eastern's surmise was easy to predict because it was overpaying the
pilots and a few other extravagent spendings.

I disagreed, in general principle, on the Free Market principle that
no salary is too high, and cited examples in sports where the teams
didn't go bankrupt because they pay some players millions of dollars a
year -- which *I* think is ridiculous, but that's what the market will
bear.


Not entirely. Many of the weaker teams cannot afford the higher salaries
of the star players. Even with a redistribution of broadcast income,
they may not be able to survive. A recent example was the sale of the
Montreal Expos, which could not generate sufficient income to pay the
salaries of really good players. They would lose any standouts to
higher paying teams, leaving them with second string players.


That's PRECISELY how the FREE MARKET principle works at its best!
No salary is too high for THOSE who can afford to pay, and they DO.

When a midget tries to act like a giant, in business, that's exactly
what "mis-management" is about! You have in fact exemplified my point.


Again, in GENERAL principle, any business that fails ultimately can be
blamed on the owner of the business (or its management).


Perhaps in a general sense, but there are examples which defy the rule:
The management of transatlantic steamship companies could do very little
to counter the introduction of the jet airliner. The rules of the game
changed overnight, and they lost the majority of their passengers just
that fast. No reduction in fares would have been sufficient to retain
the business.


How did they DEFY the rule? The wise management would have immediately
gotten OUT of playing the game! Reduction of fares would be wishful
thinking and just another example of mis-management! No different in
the case of horse-and-buggy business when automobiles changed the
rule of the game. They are still IN BUSINESS, but pretty much limited
to the tourist rides in Central Parks and other amusement markets
and the regular market for the Amish (in the USA) who have not yet
yielded to the modern evils of using electricity, automobiles, and
other things we call necessities.


James blames it all on deregulation.


That's a bit too black and white,


Agreed. I could have changed "all" to "mostly" and it might have
been a more accurate characterization, except what I read was ALL
blamed on dereg.


though I certainly feel that
deregulation was the root of their problems. They fell sooner than
other airlines because of bad timing and bad luck, which has some
management overtones. While a different management strategy might have
helped somewhat, it would have only delayed the inevitable. A company
like Eastern could not change quickly enough to react to the effect of
deregulation.

If it were a completely deregulated industry, then it would have been
the Free Market, and that would be the perfect business environment
for competition and survival of the fittest. Unfortunately the
deregulation is only PARTIAL, and the airlines are subject to all
kinds of regulations which restricted their "free" choices!


Again, the rules can change fast enough that they still can't compete.


The Free Market principle is MORE than just how to compete! It
partly entails jumping out of a boat that's rapidly heading down the
Niagara Falls!


I am somewhat sympathetic to the theory of blaming it all on the
change of rules that is bring down the entire airline industry,
leaving no airline unscathed.

If that WERE the case, then the airlines themselves are to blame for
the collective stupidity of not getting OUT of competition that kills
everyone, winner and loser! There is no regulation against an airline
selling itself (while it was still profitable) and get into other
industries of better fair-competitions among large and small
companies.


It was too late to get out. Once deregulation established the lower
cost, all of the airline's assets devalued to the point where the
companies were defacto in bankruptcy.


I don't think that was true -- that it was a sudden catastrophy that
put all the airlines in defacto bankrupcy. Even if it WERE, it
would have been the time to bail out, rather than hang on futilely
for the inevitable.

Look at it this way. If ALL of the airline except ONE bailed out
immediately, don't you think that surviving airline would have been
the surviver today? UNLESS of course some NEW airline (in the Free
Market) found the Achille's heel?

All they could do is cut and run,


Then that's what they should have done!

but that also assumes that the management of the company has the benefit
of seeing what eventually happened to the industry. Eastern, and their
shareholders, thought they could survive by expanding to gain a critical
mass that would support their high cost structure.


Then the shareholders CONTRIBUTED to the mismanagement. I owned
at least 10,000 shares of Eastern at the time if was still worth
$7 or $8 a share. I bailed out. Not sure how much I lost in
that investment. BUt it sure was better than waiting until Eastern
was belly up completely. :-)


Therefore, their options were to declare immediate bankruptcy, or try
the alternative of growing to profitability. The tried the latter, and
the financial downturn of the Gulf war was their eventual undoing.

To me, that's the bottom line of "the buck stops at the Management".


That's very convenient, and simple to say, but luck also enters into the
picture. Business is usually a gamble, and certainly never a sure
thing. Some people take the risk and win, others lose. If they only
ever bet on the sure things, our economy would be dead.


Of course all businesses are GAMBLES. That's the "axiom". I stressed
that point in my teaching of statistics, risks, and I used that axiom
against those ignorant preacher who equates gambling to "sin" while
the church engages in all kinds of business gambles in "investment".
:-)

Hero or goat, the glory or blame goes to the decision maker.


That's what capitalism is about. However, there are also those who
begrude the winners the glory when they make it big. Look at the oil
companies and their profits.


So what's your point.

It's interesting that I think we see eye-to-eye on what BUSINESS is
all about -- undertainties, gambles, ...

yet we DIFFER on how one can GET OUT (or BAIL OUT) of a sinking
ship -- which is always ONE of the available decisions -- to
abandon ship before it's completely sunk.


That's how K-Mart, S-Mart, and other Marts all lost to the
better-managed Wal-Mart. Walmart didn't get big (like American)
overnight. It just grew by leaps and bounds because of better choice
of products, better layout for that kind of market, etc. It's unfair
competition to other retail store NOW -- that's for sure!


Nothing unfair about it. That is how all business operates. WalMart
simply is winning by a better strategy and deserve credit for their
accomplishment. Unlike the airline industry, they did not sweep over
their competitors because of a parallel to airline deregulation. Rather
than a revolution, the retail industry simply evolved.


What's fair and unfair is of course in the eyes of the beholder.

I call it "unfair" because the VOLUME discounts Walmart gets from
the manufacturers that are NOT available to mom-and-pop stores makes
it "unfair" to the small retailers of the same products!

OTOH, I AGREE with you that it is FAIR in the "survival of the
fittest" though somewhere alone the line we would get into the gray
areas of "monopoly" and Uncle Sam would again have to stick its
nose in the bidness as it did in the airline and other bidnesses.


I am back to the Free Market principle via the same route! Every
business has a CHOICE to compete or not, or how to compete, in an
unregulated market seemingly dominated by one BigBoy. The computer
and software industry seems to be doing quite well, with many
companies going down the tubes against Big Blue or Microshaft, while
other companies are competing successfully in the industry dominated
(past or present) by those Big Boys. Untimately the one-time Big Boy
of Big Blue had to re-evaluate its market to start as a Little Boy to
compete against Bill Gate's Big Boy.

That's the way free competition should be. The USA is hardly a
perfect Free Market, but is about as good as it gets, in practice.


That's nice to say in theory, but it is rarely the case in a high
capital cost industry like transportation. snip


Any mention of theory vs practice always reminded me of one Flash
Gordon (his real name) whom I met in 1993:

To quote Flash Gordon, M.D., who posted these immortal
words in his .sig, in 1993:

FG in theory, there is no difference between
FG theory and practice. but in practice, there is.
FG flash gordon, m.d.

Flash is a PRACTICAL Man (and M.D.) of many interests:
http://www.motosites.com/Detailed/396.html

and I believe both he and his wife are practicing M.D.s in
San Francisco now.

-- Bob.

  #29  
Old October 19th, 2005, 01:42 PM
James Robinson
external usenet poster
 
Posts: n/a
Default Airline Biz Crisis: Not Difficult To Predict

"Frank F. Matthews" wrote:

James Robinson wrote:

Perhaps in a general sense, but there are examples which defy the rule:
The management of transatlantic steamship companies could do very little
to counter the introduction of the jet airliner. The rules of the game
changed overnight, and they lost the majority of their passengers just
that fast. No reduction in fares would have been sufficient to retain
the business.


Reduction in fares would not have worked. Perhaps, however, rethinking
the business plan and trying to consider how to redeploy their assets
might have managed a much better 60s. They were quite wedded to the
transportation model and loth to try the Cruise model.


They did embrace the cruise model. Many of the transatlantic ships at the time were
specifically designed to be deployed to the Carribean or Mediterranean in the winter.
There just wasn't the market then that there is now, so there was a limit to how many
ships could survive competing for a limited number of tourists. The cruise market
didn't really take off until cheap fares became available with airline deregulation.
 




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